Jacobs Engineering Group provides engineering, procurement, construction, and maintenance services to a wide range of customers, including oil and gas, chemical, pharmaceutical companies as well as for U.S. federal government agencies. Most work takes place in the USA, U.K. and Ireland.

Jacobs has had an enviable long-term record of increasing sales, earnings and book value. They have done this all with internally generated funds. As of June 30th they held $1.059 billion in cash against less than $48 million in total debt.

Here are their per share (split adjusted) numbers as reported by Value Line:

FY (end Sep.)

Sales

C/F

EPS

B/V

Avg. P/E

2002

41.59

1.32

0.99

6.30

17.5x

2003

41.33

1.46

1.14

7.54

17.1x

2004

40.51

1.44

1.13

8.86

19.3x

2005

48.47

1.71

1.29

9.81

20.2x

2006

62.90

2.08

1.64

12.03

23.4x

2007

70.49

2.85

2.35

15.34

21.6x

2008

91.70

3.98

3.34

18.30

24.1x

Zacks sees FY 2009 and FY 2010 EPS at $3.26 and $2.98 respectively. That takes into account both the slow economy as well as the less than robust market conditions in the oil and gas industry.

That puts the trailing multiple at about 13.7x and the forward year’s P/E at< 15x. Compare those with the historical P/E valuations in the prior 7 years from the chart above. A return to about 17 times what should be cyclically low FY 2010 earnings would bring these shares back to over $50 again.

Value Line projects EPS of $4.60 over the next 3 - 5 years. Morningstar assigns a current ‘fair value’ of $53 /share. Standard and Poors assigns JEC their highest (5-Star) rating and carries a 12-month price target of $57 /share. Value Line also notes that Jacobs Engineering has 90th percentile rankings in both ‘price growth persistence’ and ‘earnings predictability’ (with 100th being best).

How can you best play a high-quality stock like Jacobs when you feel the year-ahead earnings will be lower? Consider buying the shares and selling LEAP options for 2012.

Why so long? By then earnings should be picking up with the broader economy. If you leave both the shares and the options alone through their early 2012 expiration (and things go as expected) you will get tax deferment on the gains until you file your tax-year 2012 Schedule D in April 2013.

Jacobs has a fairly high (1.45) Beta making options premiums quite attractive for sellers.

Here’s a play that looks quite good to me right now…

Cash Outlay

Cash Inflow

Buy 1000 JEC @$44.60 /share

$44,600

Sell 10 Jan. 2012 $50 calls @$10.30 /sh.

$10,300

Sell 10 Jan. 2012 $50 puts @$14.30/sh.

$14,300

Net Cash Out-of-Pocket

$20,000

If Jacobs Engineering rises to at least $50 (+12.1%) by the Jan. 2012 expiration date:

· The $50 calls will be exercised.
· You will sell your shares for $50,000.
· The $50 puts will expire worthless.
· You will have no further option obligations.
· You will end up with no shares and $50,000 cash.

That would be a best-case scenario gain of $30,000/$50,000 or 150% profit
on shares that only needed to rise by 12.1% over the 27-month term of this trade.

That’s a very nice annualized return.

What’s the risk?

If JEC fails to rise to $50 by expiration date in Jan. 2012:

· The $50 calls will expire worthless.
· The $50 puts will be exercised.
· You will be forced to buy another 1000 JEC shares.
· You will need to lay out an additional $50,000 in cash.
· You will end up with 2000 shares of JEC.

What’s the break-even point on the whole trade?

On the original 1000 shares it’s their $44.60 /share purchase price
less the $10.30 /share call premium = $34.30 /share.

JEC could drop by as much as $9.60 /share or (-21.5%) without
causing a loss on this trade. While it’s not impossible that Jacobs could be that low it seems unlikely. The absolute lows in calendar 2006 and 2007 were $33.60 and $38.30 respectively on EPS of $1.64 and $2.35. Book Value has increased about 80% since 2006 and EPS by almost 99%.

The dividends can't be subtracted from the initial outlay -- they will be paid over the 26 months between now and the end of 2011. But you're right -- I did double-book the options, as I thought you were doing, but it appears you're not. My apologies. How about:

I was using the same strategy of buy- write as well as writing Put options, however i was doing it for 1 month expiration. The 2nd month i got hit when JEC took a hit. I now own shares at $45 minus the option premiums collected for 2 months.

Should I sell covered call for 2012 now or wait for it to cover to 40's ? I dont want to write PUTS and add to my holding in case JEC is still down.

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